Examination of Witnesses (Questions 260
THURSDAY 6 DECEMBER 2001
260. Whether you take the fiscal stance relative
to the budget this year or to the PBR last year, there is a loosening
of fiscal stance. How much do you believe that is going to support
the economy in the next couple of years?
(Mr Dicks) I am glad you asked me that question because
I should like to eat humble pie. Those of you who were on this
Committee in the last Parliament might remember that I said at
the time of the budget that I thought the fiscal expansion was
ill-advised, that it risked exacerbating the growth of demand
at the peak of the cycle and might require a response from the
Monetary Policy Committee. Now of course I can see it was a stroke
of pure genius to keep the British economy moving ahead at a difficult
global time. I would slightly disagree with the Chancellor who
said that it is the stability orientated policy which he has put
in place since 1997. I think it was just a standard pre-election
fiscal boost which got lucky. There is no doubt about it that
the fiscal side has supported the economy. Household incomes in
real terms are rising four per cent this year. The UK consumer
is not a complicated beast; put money in our pockets and we go
out and spend it. It is not surprising therefore that consumer
spending is rising four per cent in real terms. It was with hindsight
a well-judged fiscal expansion. It does highlight the difference
between our system and the American system. The Chancellor announces
cuts in the budget and they come in at six o'clock that same evening.
We are able to get on with our fiscal expansion. We may have done
it for the wrong pre-election reasons. The United States has to
go through the politics of negotiating it. We do have a good consumer
in contrast with most other economies and that has kept the British
moving ahead. There has been an interesting development on the
MPC. They worried that the strength of the pound and increases
in public spending would have to crowd out the private consumer,
then they worried about the imbalances between the strength of
consumption and the weakness of production. Now we are all just
happy we have a consumer who is keeping the British economy moving
261. In the Pre-Budget Report in box 2 on page
50 it says that the automatic stabilisers' impact can be seen
by examining the difference between actual public sector net borrowing
and the cyclically adjusted public sector net borrowing position.
When you look at Table 2.6 with that in mind, you find that the
difference in 2001-02 is zero, next year it is zero, the year
after that it is -0.1 and then two zeroes. Is the implication
of that not that the stabilisers are not really working?
(Mr Dicks) No, it is a reflection of the output gap.
We are never very far away from trend so the difference between
the unadjusted and the cyclically adjusted measures is not very
(Mr Walton) The Treasury never wants to do this but
the other point is to look at the change in the cyclically adjusted
balance from year to year. In Table 2.6 for instance in 2001 you
are moving from a cyclically adjusted surplus on public sector
net borrowing of 1.6 per cent of GDP to a deficit of 0.3 per cent
of GDP. That is a 1.9 per cent of GDP swing there in the cyclically
adjusted balance. If you were just allowing the automatic stabilisers
to work, then the cyclically adjusted balance should not change
very much from year to year. There is actually quite a big discretionary
easing of policy taking place there. You get another discretionary
easing taking place between 2001-02 and 2002-03 because it goes
from a deficit of 0.3 to 1.1 per cent. At least on the Treasury's
numbers you have a 1.9 per cent easing in the fiscal stance this
year and another 0.8 per cent easing next year. Changes are as
important as levels.
262. Going back to the stabilisers, is it not
implied that if things are as low as this, the response to the
slowdown is coming entirely from monetary policy and the fiscal
policy is not playing much of a part?
(Mr Weale) No, that is not the case. If you look at
the contribution of the Government to overall growth in demand
both this year and the likely contribution next year, then that
is a counterpart of the cyclically adjust stimulus David was describing.
This is an occasion where despite the fact that they are now run
independently, monetary and fiscal policy are by happy chance
both working in line and both providing a very helpful stimulus
to the economy.
(Mr Walton) To give you one example, if you look at
average earning figures, private sector average earnings growth
has slowed to about four per cent and public sector average earnings
growth has picked up to about six per cent. That extra increase
in public sector earnings growth is rather faster than we have
seen in recent years. That is going to help to support the growth
in household disposable income which Geoffrey talked about and
therefore will help to support consumer spending.
(Mr Dicks) It is also part and parcel of the need
to retain and recruit public sector personnel for example. There
has been a genuine attempt to re-balance public and private sector
earnings because it was recognised that public sector earnings
have got out of line. No wonder people would not sign up for health
and education unless there was a real relative pay adjustment.
263. You seem to be saying that the golden strategy
is to be Keynesian but to be a lucky Keynesian.
(Mr Dicks) Yes.
(Mr Weale) Everyone needs to be lucky. All economic
managers need to be lucky. I do think that the sort of doctrine
which was taught in the universities in the 1970s that fine-tuning
did not work has now been completely abandoned. I actually think
that with monetary policy we have much more fine-tuning that is
desirable. I can see no logic to changing interest rates twice
in ten or 12 days for example. There is no clear mechanism by
which people should be unable to wait ten days for an interest
rate to change. For reasons that I do not understand, the received
wisdom is that monetary fine-tuning is a good thing but fiscal
fine-tuning is still a bad thing. I agree with the point which
was made that in terms of producing dollops of expenditure that
has proved difficult to handle, at least timewise, but that is
not the only possible means of fiscal fine-tuning. Although I
think that the current arrangements we have have worked very well,
there is a recognitionperhaps not so much in this document
as in earlier ones and I should like to see a general recognitionthat
monetary and fiscal policy do work together to stabilise inflation
and to stabilise the real economy. Yes, that is a Keynesian position.
If it works you are a lucky Keynesian.
(Mr Walton) Before throwing away the prevailing orthodoxy
completely, one thing I would just add is that these Government
spending plans would have been here whether or not the world economy
was very weak or whether the world economy was booming. If the
world economy had been booming, we would not have expected the
Chancellor to stand up and say he was taking money away from departments.
That is why fiscal policy is much less flexible, because once
you have said you are going to increase spending on health and
education, you are not suddenly going to take it back just because
the world economy is a lot stronger. That is where I think monetary
policy has the edge because you can change interest rates much
more flexibly, whereas with fiscal policy, at least on the public
spending side, you are only changing the plans every two or three
264. Before asking whether any of you have final
comments, I should like to address a question to Martin. Many
of the micro-economic initiatives seem to have been imported from
America, the Working Families Tax Credit and other tax credit
issues. Little attention has been paid to Europe some would say.
Is there anything you think we can learn from Europe as opposed
to North America?
(Mr Weale) One can always learn things from friends
and neighbours. One particular area I have in mind is on the question
of training, on which there is some discussion. Therewhether
the model adopted in Britain is imported from the United States
I am afraid I do not knowby comparison with continental
approaches to technical training, vocational qualifications and
apprenticeship systems, it does seem to me that there is a lot
we could learn. For example, with apprenticeships, the Government
has a quota and is possibly more concerned about meeting its quotas
or meeting the targets than actually liaising with the employers
to find out what sort of skills are needed in specific areas.
Yes, particularly on the question of training, there are things
we can learn from the continent.
265. Could this help productivity?
(Mr Weale) Yes, I would hope so.
266. Do any of you have any final comments?
(Mr Dicks) Given that my working day starts at seven,
I wish we had European time. I do not want their money, but I
wish we had their time then we could start at eight.
267. They say this Committee is quite influential,
but I do not think we could stretch to that.
(Mr Weale) May I make one final comment
on the budgetary position. It is a point which seems to have escaped,
or at least has not been commented on. If you take the budgetary
position in the Pre-Budget Report as what is going to happen,
then there is more or less room, as far as I can see, to pay for
Wanless without tax increases. Obviously the sort of figure I
am looking at is that in 2005-06 a surplus is predicted on the
current budget of £8 billion. Whether Wanless would cost
£8 billion or £10 billion depends how you do the sums.
On the Government projections there is more or less the money
to pay for it. That said, I very much share David Walton's concerns
that if I were producing prudent and cautious projections they
would show tax revenues growing only in line with nominal GDP
starting in 2003 and not the faster growth rates which the Government
has built in. Obviously if it turns out like that then more tax
revenue will be needed for extra spending or some areas of spending
will need to be cut to pay for extra health spending.
Chairman: Any comments? May I thank you
very much for your attendance this morning. It was very helpful
for us. We shall be questioning the Chancellor next Tuesday and
no doubt the comments you have informed us with this morning will
be used. Thank you.